Investments in physical capital, relationship-specificity, and the property rights approach

Patrick Schmitz

Economics Letters, 2013, vol. 119, issue 3, 336-339

Abstract: We reconsider the property rights approach to the theory of the firm based on incomplete contracts. We explore the implications of different degrees of relationship-specificity when there are two parties, A and B, who can make investments in physical capital (instead of human capital). If relationship-specificity is exogenously given, it turns out that joint asset ownership can be optimal only if the degree of relationship-specificity is sufficiently small. If relationship-specificity can be freely chosen and if party A’s investments are more productive, then the parties deliberately choose a strictly positive level of relationship-specificity and they always agree on sole ownership by party A.

Keywords: Ownership; Incomplete contracts; Relationship-specificity; Theory of the firm; Investment incentives (search for similar items in EconPapers)
JEL-codes: C78 D23 D86 L22 L24 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: Investments in physical capital, relationship-specificity, and the property rights approach (2013)
Working Paper: Investments in physical capital, relationship-specificity, and the property rights approach (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:119:y:2013:i:3:p:336-339

DOI: 10.1016/j.econlet.2013.03.017

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